The 20% solution: personal savings rates and homeownership

Personal savings dipped to its lowest point in years in the fourth quarter (Q4) of 2017, to 2.7% of disposable personal income. The last time savings were this low was when homebuyer confidence was highest, right before the 2008 recession hit. The savings rate jumped a bit during the 2008 recession and again in 2012 – the highest it’s been since 1985 – but has since trended down. Savings remain well below their peak seen in the 1970s, when interest rates were also at their height.

Today’s continued low savings trend is the result of our prolonged recovery. While jobs are recovering steadily, slow wage increases and increased rents continue to chip away at the ability to accumulate savings sufficient to cover emergencies, let alone enough for a down payment on a home. Further, the incentive for saving remains as low as the “negative” interest rates on savings accounts, which are insufficient to cover inflation increases. In turn, the savings rate remains low, meaning 20% down payments are becoming rare among first-time homebuyers.

Updated March 15, 2018. Original copy released November 2013.

Chart update 03/15/18

2017

2016

2015

Annual Personal Savings Rate

3.4%

4.9%

5.8%

Chart update 03/15/18

Q4 2017

Q3 2017

Q4 2016

Personal Savings Rate

2.7%

3.4%

3.6%

Data courtesy of United States Department of Commerce: Bureau of Economic Analysis

Gray bars indicate periods of recession.

More and more, real estate demand is driven by how much money potential buyers save. Personal savings is down. What does this mean for future demand?

Trends in saving

The 20% down payment was once the gold standard of residential mortgages. During the fevered years of the Millennium Boom, this became a quaint novelty. Buyers (and lenders) got used to the easy days of purchasing a home with 0% down, and seller-paid or financed closing costs. This low barrier to entry was seductively convenient for Millennium Boom buyers.

Unsurprisingly, this was reflected in the personal savings rates of the period. From 1952 – 1990 personal savings as a percentage of disposable income was around 8-10%, according to the Federal Bureau of Economic Analysis (BEA). During the Millennium Boom, it dropped to nearly 0%, a 50-year low. Then, the onset of the 2008 Great Recession ushered reality back through the front door. Homeowners who felt the trauma of the housing crash began wisely stockpiling cash. The personal savings rate leaped up to 6% within a year.

The personal savings rate is at 2.7% as of Q4 2017. This is the lowest it’s been since confidence was high, just before the 2008 recession.

Low savings to continue?

Over the last few decades, savings has followed a path conversely proportionate to consumer confidence. When consumer confidence runs high, the rate of personal savings falls as people spend more than they earn. When consumer confidence is relatively low, personal savings rises. A financial “comfort zone” is accommodated either way.

The hotly-debated definition of a qualified residential mortgage (QRM) was thought to force savings for those who seek the American Dream. However, it ended up falling short of expectations.

For a loan to be considered a QRM under the first proposed definition, the homebuyer needed to bring in a minimum 20% down payment. However, the final QRM rules had no down payment requirement, a huge miss for stabilizing the mortgage market. Thus, a return to higher savings rates will not originate in new housing regulations.

Even if the QRM had required a minimum down payment requirement, homebuyers still have many ways to get around providing significant down payments. In lieu of conventional financing, many first-time buyers opt for Federal Housing Administration (FHA)-insured financing. FHA-insured loans have more permissive underwriting standards, but require mortgage insurance premiums (MIPs). And, the minimum down payment requirement for an FHA-insured loan is only 3.5%.

Further, Fannie Mae and Freddie Mac now accept minimum down payments as low as 3%.

Featured Comment

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